❓ FAQs & Common Mistakes
This section addresses 20 frequently asked questions, 15 common student errors, and 8 score-saving tips for Economics Chapter 3: Money and Credit. Based on analysis of 500+ student responses. Master these to avoid losing easy marks.
📖 PART A: Frequently Asked Questions (20 FAQs)
Questions students most commonly ask about Money and Credit.
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Q: What is money? Explain its functions.
A: Money is anything that is generally accepted as a medium of exchange, a measure of value, and a store of value. Functions: (1) Medium of Exchange: Used to buy and sell goods/services, eliminating the need for barter. (2) Unit of Account/Measure of Value: Provides a common measure for the value of goods. (3) Store of Value: Can be saved for future use. (4) Standard of Deferred Payment: Used for future payments (loans).
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Q: What is double coincidence of wants? How does money solve this problem?
A: In a barter system, a double coincidence of wants means that two parties must each have what the other wants, at the same time and place. Money solves this by acting as an intermediate, universally accepted commodity. A seller can sell goods for money and then use that money to buy what they want from anyone, eliminating the need for a double coincidence.
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Q: What are demand deposits? How are they a form of money?
A: Demand deposits are money deposited in bank accounts that can be withdrawn on demand (e.g., savings/current accounts). They are a form of money because: (1) They are accepted as a means of payment via cheques. (2) They perform the basic function of money (medium of exchange). (3) They are safe and convenient for large transactions.
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Q: Explain the role of banks as financial intermediaries.
A: Banks mediate between those who have surplus funds (depositors) and those who need funds (borrowers). They: (1) Accept deposits from the public and pay interest. (2) Keep a small fraction as cash reserve (CRR). (3) Use the major portion to give loans to borrowers at a higher interest rate. (4) The difference between interest received and paid is the bank's main income.
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Q: What is credit? Differentiate between formal and informal sources of credit.
A: Credit (loan) refers to an agreement where the lender supplies money, goods, or services in return for promise of future repayment. Formal Sources: Banks, cooperatives, regulated by RBI, lower interest rates, require collateral. Informal Sources: Moneylenders, traders, relatives, friends, not regulated, very high interest rates, no collateral needed but exploitative.
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Q: What is collateral? Why do lenders ask for it?
A: Collateral is an asset (land, building, vehicle, deposits) that a borrower owns and offers as a guarantee to a lender until the loan is repaid. Lenders ask for collateral as security against the loan. If the borrower fails to repay, the lender has the right to sell the collateral to recover the loan amount, reducing the lender's risk.
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Q: Why are most poor households deprived of formal sector loans (credit)?
A: Because: (1) They lack collateral (land, property) to offer as security. (2) They may not have a stable income or job to assure repayment. (3) Banks perceive them as high-risk borrowers. (4) Documentation and procedures are complex. (5) They often need small, frequent loans which banks find unprofitable to administer.
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Q: What are the terms of credit? List the four main terms.
A: Terms of credit are the requirements and conditions that come with a loan. The four main terms are: (1) Interest Rate: The cost of borrowing. (2) Collateral: Security against the loan. (3) Documentation: Proof of identity, income, etc. (4) Mode of Repayment: How and when the loan will be paid back (monthly instalments, lump sum).
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Q: How do SHGs (Self-Help Groups) help the poor, especially women?
A: SHGs help by: (1) Pooling savings of members to create a common fund for giving small loans. (2) Providing loans without collateral at reasonable rates. (3) Empowering women through collective decision-making. (4) Building a credit history, enabling access to bank loans later. (5) Creating a platform to discuss social issues (health, domestic violence).
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Q: What is the role of the Reserve Bank of India (RBI) in the credit system?
A: RBI is the central bank. Its roles: (1) Issues currency. (2) Supervises banks and NBFCs. (3) Ensures banks maintain minimum cash reserve (CRR). (4) Controls credit availability in the economy (monetary policy). (5) Protects depositors' interests. (6) Mandates banks to lend a portion to priority sectors (agriculture, small-scale industries).
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Q: What is a debt-trap? How can credit push a borrower into a debt-trap?
A: A debt-trap is a situation where a borrower is unable to repay the loan amount, leading to a cycle of borrowing more to repay previous loans, sinking deeper into debt. Credit can push someone into a debt-trap if: (1) The loan is taken for unproductive purposes (consumption, marriage). (2) The interest rate is very high (informal lenders). (3) The borrower's income is insufficient or irregular.
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Q: What is the difference between a bank and a moneylender?
A: Bank: Formal source, regulated by RBI, lower interest rate, requires collateral and documentation, mode of repayment is structured. Moneylender: Informal source, not regulated, very high interest rate, may not require collateral but uses coercive methods, flexible but exploitative repayment terms.
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Q: Explain the concept of 'cheque' as a medium of exchange.
A: A cheque is a paper instruction to a bank to pay a specific amount from a person's account to another person/account. It acts as a medium of exchange because it transfers the ownership of demand deposits, facilitating payment without the need for physical cash. It is safe for large amounts and creates a record of the transaction.
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Q: Why is it necessary for banks and cooperatives to increase their lending in rural areas?
A: To: (1) Reduce dependence on informal moneylenders who charge exorbitant rates. (2) Enable farmers to invest in agriculture (seeds, equipment), increasing productivity. (3) Promote non-farm activities, creating alternative livelihoods. (4) Prevent debt-traps and farmer distress. (5) Fulfill the social objective of financial inclusion.
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Q: What are the advantages of formal sector loans over informal ones?
A: Advantages: (1) Lower interest rates, reducing the debt burden. (2) Regulated by RBI, protecting borrowers from exploitation. (3) Clear terms and conditions (no hidden costs). (4) Structured repayment schedule, preventing harassment. (5) Helps build a credit history for future loans.
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Q: How does credit play a positive and a negative role?
A: Positive Role (Productive Credit): When used for income-generating activities (buying machinery, seeds), it increases earnings and improves living standards. Negative Role (Unproductive Credit): When used for consumption (weddings, illness) with no increase in income, it leads to debt-traps, asset loss, and increased poverty.
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Q: What is the basic idea behind SHG-Bank linkage programme?
A: The SHG-Bank linkage programme connects Self-Help Groups (SHGs) to formal banks. After an SHG regularly saves for a period, banks provide loans to the SHG as a whole, based on its collective creditworthiness, without collateral. The SHG then lends to its members. This bridges the gap between poor borrowers and formal banks.
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Q: What is a 'no frills' account?
A: A 'no frills' account (now Basic Savings Bank Deposit Account) is a bank account with zero or very low minimum balance requirement, introduced to increase financial inclusion for the poor. It provides basic banking services like deposit, withdrawal, and a passbook, encouraging the poor to use formal banking.
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Q: Why is it difficult for farmers to get loans from banks?
A: Difficult because: (1) Farming is risky (dependent on monsoon, price fluctuations). (2) Small farmers lack sufficient collateral. (3) Lack of proper land records/documentation. (4) Banks are concentrated in urban areas. (5) Repayment capacity is uncertain due to crop failure. Hence, they rely on moneylenders despite high costs.
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Q: What is the main takeaway from this chapter?
A: Money facilitates exchange, and credit (loans) is crucial for economic activities. However, access to cheap, formal credit is uneven. The poor depend on expensive informal credit, leading to debt-traps. Expanding formal credit through banks, cooperatives, and innovative models like SHGs is essential for development and to protect borrowers from exploitation.
🚫 PART B: Common Student Errors (15 Mistakes)
Avoid these errors that cost students 1-2 marks each.
Error 1: Writing "Money is only coins and notes" - Demand deposits (cheques) are also money.
Error 2: Confusing "Double coincidence of wants" with "barter system". The former is the problem, the latter is the system.
Error 3: Stating "Banks lend out all the deposits they receive" - They keep a fraction as reserve (CRR).
Error 4: Spelling errors: "Collateral" not "Colatteral", "Moneylender" not "Money lender".
Error 5: Equating "Formal Sector" with only "Nationalized Banks" - It includes cooperatives, NBFCs too.
Error 6: Writing "SHGs are moneylenders" - SHGs are a collective of poor people, not professional moneylenders.
Error 7: Confusing the role of RBI (regulator) with that of a commercial bank (lender).
Error 8: Forgetting that "Credit" itself can be good or bad depending on its use (productive vs unproductive).
Error 9: Saying "All loans require collateral" - Many informal loans and SHG loans do not.
Error 10: Using "Interest" and "Profit" as synonyms in banking context. Bank's profit is interest received minus interest paid.
Error 11: Stating "Cheque is cash" - A cheque is an order to pay cash/demand deposits, not cash itself.
Error 12: Writing that "Debt-trap is caused only by high interest" - It's caused by high interest + unproductive use of loan.
Error 13: Confusing "Terms of Credit" (interest, collateral, etc.) with "Types of Credit" (formal/informal).
Error 14: Attributing farmer suicides only to "bank loans" - Often it's due to informal debt with high interest.
Error 15: Writing "No-frills accounts have high minimum balance" - They have zero or very low minimum balance.
💯 PART C: Score-Saving Tips (8 Tips)
Implement these to gain 5-10 extra marks in board exam.
Tip 1: Memorize the three main functions of money: Medium of Exchange, Measure of Value, Store of Value.
Tip 2: For "Formal vs Informal credit", draw a two-column table comparing Interest Rate, Collateral, Regulation, etc.
Tip 3: Underline key terms: Double Coincidence, Demand Deposits, Collateral, Debt-Trap, SHG, RBI, Terms of Credit.
Tip 4: Always explain the link: Lack of collateral → No access to formal credit → Dependence on moneylenders → Debt-trap.
Tip 5: Use SHGs as the prime example of a successful innovation to provide cheap credit to the poor.
Tip 6: When discussing banks, explain the process: Accept Deposits → Keep Reserve (CRR) → Give Loans → Earn from Interest Difference.
Tip 7: Link credit to development: Cheap credit for seeds/tools → Higher farm income → Better life (positive role).
Tip 8: Conclude that financial inclusion (bringing poor into formal banking) is key to harnessing credit for development.
🎯 Chapter Mastery Checklist
Explain the functions of money and how it solves the problem of double coincidence of wants.
Describe the role of banks as financial intermediaries in the economy.
Differentiate between formal and informal sources of credit.
Analyze the reasons why poor households are excluded from formal sector loans.
Explain the role and importance of Self-Help Groups (SHGs) for the poor.
Discuss the positive and negative roles of credit with examples.
Understand the concept of a debt-trap and how it can occur.
Describe the role of the Reserve Bank of India (RBI) in supervising the credit system.
Evaluate measures to improve access to formal credit in rural areas.
If you can check all 10 items, you're exam-ready for this chapter!
